Finance Minister Nirmala Sitharaman’s budget proposes the much-anticipated increase in the limit of Foreign Direct Investment (FDI) in the insurance sector to 100% from the current 74%. But it comes with some riders.IRDAI Chairman Debasish Panda told CNBC-TV18 that this is an opportune time to increase the FDI limit in the insurance sector.The last time the FDI limit in insurance was raised to 74% from 49%, it hardly succeeded in bringing in foreign capital. However, IRDAI Chairman is confident allowing 100% FDI will enable foreign insurers and investors to plan their business independently, without depending on the domestic partner.
He believes this higher FDI limit will largely help bring in a lot more capital, capacity and expertise to the Indian insurance sector, thereby building an ecosystem that can cater better to India’s population which is still largely uninsured or underinsured.Though the Finance Minister’s announcement of making income up to ₹12 lakh tax-exempt brought smiles to many, life insurers appear concerned as they could be on the losing side. The worry is that if more people shift to the new tax regime, it may reduce the incentive to purchase life or health insurance for tax savings. This is because the new regime does not offer exemptions under Sections 80C or 80D. Estimates suggest that 5-7% of the life insurance industry’s individual new business premium comes from 80C tax benefits.Also Read: Why HDFC Life CEO isn’t concerned about higher insurance FDIHowever, HDFC Life’s MD & CEO, Vibha Padalkar, clarified that only about 2% of the insurer’s individual new business premium is linked to 80C. The announcement initially dragged life insurance stocks down by 5-6%, though they recovered most of the losses by the end of the trading session.Additionally, the government has provided clarity on Unit Linked Insurance Policy (ULIP) taxation. Currently, ULIP returns are taxed if the annual premium exceeds ₹2.5 lakh, with the taxation based on the individual’s income slab, often leading to higher tax rates. The government has now clarified that these ULIP policies will instead be taxed under capital gains at 12.5%, which is lower than taxation based on an individual’s income slab.(Edited by : Poonam Behura)
